What Is Hotel Room Investment?
A hotel room investment can give you a regular passive income together with an exit strategy that can deliver a lump sum profit when you decide to sell up. As an investor you can enjoy the regular, passive rental income along with the lump-sum profit on exit without having to do any work at all – these are truly hands-free investments! As the investor, all you need to do is write the cheque and then sit back and collect your assured returns as everything is fully-managed on your behalf.
Hotel room investments do not require a property investment expert to figure out – these investments have the same fundamentals as a buy-to-lets. Essentially with a hotel investment, you are purchasing a hotel room and putting it up for let. Hotels experience a continuous stream of short-term tenants who are willing to pay high rates for the high standard of accommodation and facilities within the hotel. The management company of the hotel will advertise the hotel and find guests (tenants) to stay in the hotel room. They will also be there to maintain the property and collect ‘rent’. Although the guests are short-term tenants, they still have to pay for their stay and this is where your ‘rental income’ will come from when you invest in a hotel room property.
This article will consider the basics of a hotel room investment, the advantages that come with such a specialist investment. With a low entry price, regular income, the readily available advice in the market place and research at your fingertips, the risk is low. We will also go over how to mitigate common risks that come with investment in hotel rooms to give you an all-around guide to the hotel investment sector and how it can make you more money on your investments.
How Does Hotel Room Investment Work?
A hotel room investment is a great way to turn your savings into a steady income and increase the health of your finances through serviced and fully-managed property whilst retaining and even growing your original lump sum. These investment opportunities make great investments because they can give you an average yield of around 10% each year. If you invest £50,000 into this type of investment, you can expect to receive an annual income of £5,000 from the rental returns which is £600 each month!
Compared to other forms of investment such as a FTSE 100 company shares portfolio (4%), cash deposit accounts (1%) and 10-year gilts (0.95%) a these investments offers a much better return than any asset class outside of property investment at this time.
What Makes Hotel Investments Different To Other Strategies?
Unlike regular buy-to-lets, where the landlords want to find long-term tenants who are willing to cope with the uncertain rental market price increases, hotels are geared towards tourists who stay for the short-term but are willing to pay the one-time hotel rates during their holiday or business trip.
Many investors hold back on residential buy-to-lets because they don’t know if they’ll be able to find tenants, but there will always be a demand for hotel rooms, especially in places where the tourism is booming. Many people experience this when they go to book a hotel room last minute, and there are none available for the dates they want.
Smaller, more independent hotels are some of the most successful property investment schemes. The owner of the hotel will commission a professional management company with a great track record to ensure the success of the hotel.
You may be wondering, “if hotels are so successful, why do they need private investors to buy rooms?”
The answer is simple – it is a business. Hotel owners will offer buy to let hotel rooms to investors to raise finance and build capital. That is why hotel investments usually come with a buy-back option, where investors have the option to sell the room back to the hotel owner for a fixed percentage above the original purchase price after a number of years, thus assuring capital appreciation as well as regular rental income, as hotels eventually want to regain control over their assets.
Hotels are expected to do well throughout 2018
The Brexit ambiguity has left investors questioning whether UK hotel room investments are worthwhile, however, it has been reported that regional hotels are expected to do very well in 2018. A report published by PwC stated that while London may suffer from oversupply and inward business travel may dip, regional hotels are likely to benefit from the weaker pound which will encourage overseas visitors. In particular, areas such as Liverpool, Manchester, Cardiff, Birmingham, Glasgow and Edinburgh will be the best locations in the UK. Overall the hotel sector was forecast to experience a record 77% occupancy rate across the regions and remain there. Occupancy, revenues and rates are expected to increase because more Brits will choose to go on holiday in the UK and overseas visitors will also increase.
Hotel room investments allow property investors to boost income and protect capital with assured capital growth. This means that this can be a secure long-term investment for up to 10 years, allowing you to receive a rental income as well as some capital growth when a decision is made to exit the investment.
Returns Compared With Other Investments
In terms of high annual yield, a hotel room can give you great returns on your savings compared to other assets.
In comparison to other types of property investment, when you invest in a hotel it will offer higher returns despite the lower entry requirement. With a regular buy-to-let investment, depending on the area, the NET yields will only be around 7% or less in 2019, and generally the further down south you go the lower the yields due to expensive overheads. This brings us to another advantage of hotel room investment – there are no ongoing or hidden costs – once you have purchased the unit you will not be asked to make any further payments and the assured returns are NET returns which means that no deductions will be made from this income.
Furthermore, when you invest in a hotel, unlike a regular buy-to-let where the property market is a big factor in the profits you can make, a hotel investment doesn’t rely on the trends in the UK housing market. Similarly the sector doesn’t rely on students coming to the UK like the student accommodation sector. When you invest in hotels it is classed as a commercial property transaction rather than residential and so this means that there is the added advantage of being exempt from stamp duty tax.
Hotel Room Investments Can Diversify Your Portfolio
Like a number of other alternative property investments, hotel room investments are exempt from stamp duty as a result, there has been a lot more focus from investors on the commercial sector. Conversely, the increase in Stamp Duty along with decreases in tax relief has made regular buy-to-lets unattractive and less profitable, encouraging investors to look into diversifying their portfolio with other property investments so their income is not compromised. Leaving all your eggs in one basket can be risky because if the market or property legislation changes, your entire portfolio will suffer if it’s not diversified. So it makes sense to join the increased numbers of income and growth-hungry investors by investing in a hotel room.
Hotel room investments are such a good way to diversify your portfolio because they allow investment across property types, business types and geographical locations with ease. Hotel investments have a low entry level compared to other investment properties, so with this cheaper entry price, it is possible to buy two or three different rooms for the same cost as a single residential buy-to-let, increasing your returns significantly. If you want to spread your risks from residential buy-to-let to commercial property, then a hotel investment is the way to go.
Experts in property investment will also recommend that you diversify your property portfolio by investing in different locations to avoid the effects of local economic downturns and protect your property investments. Not only does investing in different types of property take advantage of different growth and income dynamics but switching around the location of your investments can also smooth your portfolio’s performance.
Hotel Room Investment – The Best Property Investment of 2019 – 2020
Making a hotel room investment is great for both you, the investor, and the hotel owners because they offer the hotel investor a high-yielding rental income, whilst at the same time giving the owner of the hotel more finance to run their business.The money that gets invested in the hotel will go towards the refurbishment, repairs, maintenance and other essentials, which will also benefit the guests because the standards will be higher.
Your investment returns will come through rental income. This is the money that comes from guests ‘renting’ your room for their holiday. When you invest in a hotel follows the same principles as a buy-to-let in that you buy a room in a development to let to tenants, and you make a percentage back each year from the tenant staying in your hotel room.
These specialist investments do not need to be managed by the investor because the property continues to be run by the hotel staff, owners and management company. The repairs and maintenance will also be covered the management team.
Essentially, as the investor, you will not be responsible for dealing with guests, making repairs, collecting ‘rent’, or advertising for guests – so it requires none of your valuable time. This hassle-free source of income is the perfect opportunity to get the most out of your money instead of having it sitting in a bank where interest rates are low.
Length and Exit Strategy
Hotel room investments are also fairly long-term. In 2019 the best of these investments will offer a 5 year rental assurance at around 10% NET. However the term can last for 10 years or longer as the investor legally owns the room (purchases will come with a title deed), which mean the investor can continue to receive a rental income of around 10% or more of the purchase price until they decide to sell it on.
The very best opportunities will also offer an exit strategy, generally in the form of an assured buy-back option of 110% or more after 5 years. This provides a built-in exit strategy for you with assured appreciation should an investor want to sell to free up cash.
What Are The Advantages Of Buy-To-Let Hotel Rooms Investment?
Low cash and no mortgage requirements – A hotel room investment has a low entry price compared to a regular buy-to-let property. Most people who do invest in a residential buy-to-let, rather than hotels, will either need deep pockets or a mortgage to fund the majority of the investment. According to Nationwide’s House Price Index the average UK house price in August 2019 was £216,096.
Low Entry Price But No Mortgage Option
No admin required – these kind of investments are very straightforward because there isn’t any admin or maintenance requirements. As the investor, you buy a room which is registered to you at the land registry. After investing you receive payments from the room every three-months for at least 5 years.
Hotel room investments also don’t have the complicated tax relief rules or associated cost deductions to calculate – as already noted, as a commercial property they are exempt from stamp duty.
Fast results – This kind of investment is also fast. As soon as you complete on the property, you will start to see the money come in from the rental yield. Unlike other investments where the property may need refurbishing, a hotel room investment is usually ready to go as soon as the offer comes to market.
Diversifying your portfolio – By investing in hotel rooms you can diversify your portfolio . Many investors will focus on residential buy-to-lets and possibly student properties, however, a hotel investment can be a good way to balance your portfolio so that your eggs aren’t all in one basket. Diversification allows you to spread your risks should sectors in the property market experience volatility.
The hotel industry is also independent of the wider residential property market,so, if you are experiencing void rental periods with residential properties, having a hotel room investment in your portfolio can give you the income from investing you need.
Furthermore with the political and environmental changes currently underway in the UK, the domestic leisure and tourism industry has been growing, with occupancy rates up, and is forecast to continue to do so;
RevPAR (Revenue Per Available Room) and ADR (Average Daily Rate) is expected to grow during 2019 and despite the Brexit uncertainty, the UK already beat their 2020 tourism target of 40 million annual inbound visits, with 40.9 inbound visits in 2018.
Hotel Room Investment – How To Avoid Any Possible Risks
Not a quick win (very little capital appreciation) – Hotel investments are generally suited to long-term investors, which is why they have assured rent for up to 5 years. Traditional buy-to-lets will have rental income as well as capital appreciation to make profits from, but hotel room investments aren’t known for their capital appreciation, although an investment with an assured buy-back will give you a reasonable level of capital appreciation – probably more than a residential property in the current market.
The location (it does matter) – The location is very important because it needs to be in an area where visitors are willing to stay in a hotel. There should also be a thriving tourist attraction near the hotel to attract guests to the area in the first place. Hotel room investments are investments in a property and also in a business, so you need to think about the ‘customers’ as well as the demand in the area of the hotel.
There will be competition – When investing many people disregard the possible competition that they may be facing if they pick a hotel room investment in a certain area. Similar to residential buy-to-lets in London and even Manchester, the competition is becoming fiercer because the supply of properties for tenants to rent is over-saturated in some areas. As a result, tenants have so much choice, they may not even see your property as an option.
What Competition Exists In Hotel Property Investments
For buy-to-lets, the competition will affect the rental yields over time, but hotel rates generally stay steady and are more affected by predictable seasonal changes rather than the whims of the property market. However there are hotels that market heavily to the local area as well as tourists and these hotels that are busy all-year round are the ones you really want to be investing in!
On the other hand, if there is no competition you may need to ask yourself if there is really a demand for the type of hotel room investment you are thinking of getting involved in and whether you will get your returns. Again, doing your research and getting good advice will help you avoid costly mistakes – at Sterling Woodrow, we do all the research up-front and only offer properties to our clients that have high assured yields and are underwritten by reputable development companies with a history of delivering for investors.
The track record of hotel management – Although the location and appearance of the hotel is important, the experience of the guests should be just as important to any investor. If the guests that stay at the hotel aren’t satisfied with their stay, will not return and are likely to leave bad reviews meaning future guests will be put off from staying at the hotel.
Increase Your Property Wealth With A Hotel Property Investment
Hotel property investments have shown themselves to be quite resilient to changes surrounding the EU Referendum. Savills reported an increase in the amount of hotel investment deals completed in the market. The report highlighted 220 completed deals in 2016 compared to just 195 completed deals in 2015.
The numbers of private investors making hotel room investments experienced a dramatic rise of 152% and hotel room investments by property companies increased by 65% too! This high rise in numbers from both private and company investors is further proof that there is a growing demand in the hotel investment sector.
With a hotel investment, you can expect to receive a net rental yield of 8%. A monthly income of 8% per annum will give you the chance to raise capital to reinvest into your portfolio or save for your retirement.
For a fairly low entry price, this high net yield will give you a great return on investment over a period of 5 or 10 years, at which points investors have the option of activating the buy-back clauses contained in the contract, which can be up to 120% of the original purchase price. Whatever your goals may be, with both rental returns and capital appreciation assured a hotel investment can fulfil them in a way few other investments can.
Hotel Room Investments – Investors Summary
Every investment needs to be assessed on its own merits and cross-referenced with your own circumstances to ascertain how suitable it is for you. As far as hotel room investments are concerned, these commercial investments are considered to be a low-risk/high-reward investment because of the low-entry price, zero maintenance costs (as the management company takes care of this) and high NET yields, not to mention being stamp duty exempt and with a built-in exit strategy that assures capital growth should you wish to sell. As an investor, a hotel room investment would make a great addition to your property portfolio, adding diversity and security from tax changes and rental market dips.
Sterling Woodrow – Your Property Investment Partner
Sterling Woodrow are a company who pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions.
We also work with experienced investors to help them increase the value and profitability of their portfolios.
Get in touch today for your complimentary hotel room investment consultation with one of our senior property investment managers. We cannot wait to help you with your property investment journey.
Sterling Woodrow is not authorised or regulated by the Financial Conduct Authority (FCA) and clients who proceed to invest will not have access to the Financial Ombudsman Service (FOS) or the financial services compensation scheme. Please read our Disclaimer for more details.